GREF RISES TO THE STABILIZATION FUND’S DEFENSE

The Stabilization Fund should amount to at least 10% of GDP

Economic Development Minister Herman Gref has responded to deputy Cabinet chief-of-staff Mikhail Kopeikin’s proposal for part of the Stabilization Fund to be invested in shares. According to Gref, priority should be given to security and liquidity rather than rates of return.

Economic Development Minister Herman Gref has responded to deputy Cabinet chief-of-staff Mikhail Kopeikin’s proposal, published in this newspaper, for part of the Stabilization Fund to be invested in shares. According to Gref, if Russia’s petrodollars are invested in any assets, including the shares of foreign companies, priority should be given to security and liquidity rather than rates of return. Buying shares, as the Cabinet staff proposes to do, is possible – but this should be done “very conservatively,” says Gref. The Central Bank also says that a sum equivalent to at least 10% of GDP should be “untouchable.” At present, the Stabilization Fund contains about half that sum.

Herman Gref’s statements came in response to a recent article (see Izvestia, March 13, 2006) by Mikhail Kopeikin, deputy Cabinet chief-of-staff, which proposed investing up to a third of the Stabilization Fund in the shares of foreign companies. Speaking during a visit to Cannes, Gref said: “Rate of return is not the decisive factor for the Stabilization Fund in its present condition. What’s important is to keep it secure and rapidly-convertible, liquid.” As for buying shares in foreign companies, Gref said: “The range of instruments may be gradually expanded, but very conservatively.”

Experts say that Gref is focusing on insurance, which is rational behavior at this stage.

Firstly, Russia’s Stabilization Fund is relatively young, having been established quite recently. It currently contains around 1.5 trillion rubles, but this sum is only 6% of GDP. In other countries that are saving their petrodollars for a rainy day, this indicator is comparable to their GDP.

Secondly, as the Economic Development Ministry and Finance Ministry have noted repeatedly, international oil prices are now at a peak. They will fall over the next few years; the two ministries and most Western investment companies agree on that. The question is how fast oil prices will fall. It’s no secret, after all, that oil prices are the chief indicator for stock exchanges around the world, since oil corporation shares are a significant factor in stock market indexes.

Thirdly, the Stabilization Fund’s liquidity depends on how the money is invested. At present, all the money is kept in the Central Bank, in rubles. Yaroslav Lisovik from the United Finance Group says: “As a first step, even before investing in shares, it would be appropriate to diversify the currency used to store Russia’s oil money.”

Alexei Uliukayev, first deputy chairman of the Central Bank, sided with Gref yesterday. “The primary nature of the Stabilization Fund should be insurance for budget risks, as well as risks associated with excessive money supply,” said Uliukayev. According to him, Russia should wait unti the Stabilization Fund amounts to 10% of GDP – enough to cover federal budget spending for four to five years in the even that oil prices fall. Any additional revenues entering the Stabilization Fund could then be used for high-risk, high-return operations. An investment management company would be needed: the Central Bank is proposing itself for this role, in cooperation with private companies or VneshEkonomBank (although VneshEkonomBank would first have to gain the relevant license).

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